Solvency

Under Solvency is understood in the insurance and banking equipment of an insurer or credit institution with its own resources, so free, unloaded assets. The own funds are used to cover self-realizing risks of the insurance or the lending business and thus secure the claims of policyholders or creditors, even in unfavorable developments. Thus, these claims are all the more better secured, the higher solvency. The own funds consisted mainly of equity, statutory and free reserves and profit carried forward.

Insurance

The solvency of insurers is regulated in § 53c para 1 Insurance Supervision Act (VAG). After that insurers are to ensure the constant ability to fulfill the obligations under the insurance policies required to free unencumbered resources in the amount of so-called solvency margin ( strictly speaking, but there is no spread, but one amount ) to form, which is measured by the total volume of business.

It should be noted that the determination of the solvency margin does not refer directly today on the risk situation of the insurer, but mainly refers to pure -balance-sheet sizes. Thus, the actual risk situation is considered not always correct.

The calculation of solvency is regulated in the capital outfit Regulation ( KapAusstV ). This on the other hand adopted different solutions for life insurance (including pension and death benefit funds ) on the one hand and all other divisions.

The least vorzuweisende target solvency can be distinguished in three stages:

• Solvency margin, the percentage is calculated as a function of the premium income and claims expenses. In life insurance, the solvency margin is mainly measured in relation to the provision for future policy and risked capital.
• Guarantee Fund in the amount of one third of the solvency margin
• Absolute minimum guarantee fund in the amount of € 2.3 million each to betreibendem branch ( in particularly risky classified branches, such as liability, this amount is € 3.5 million).

The actual solvency is determined by the Unencumbered own funds. Their essential components are

• The sum of equity and equal function (ie esp. verlusttragungsfähigen ) debt, that is, subordinated and hybrid capital instruments
• Certain hidden reserves ( valuation reserves, such as investments )
• The margin potential at mutuals
• Free parts of the provision for premium refunds ( surplus funds ) for life insurers ( including the final bonus fund )
• To 2009 also future gains in life insurers

A sufficient solvency in terms of VAG is given when the actual solvency at least equal to the target solvency.

If the actual solvency but the target solvency falls below nor more than one third ie more than the amount of the guarantee fund is the insurer must establish a solvency. If the actual solvency under the value of the Guarantee Fund is a financing plan set up.

Previously, the solvency rules were relevant only for primary insurers, as it mostly because of their lack of knowledge of the insurance matter sees their customers as particularly worthy of protection. Since 1 January 2005 but is now also subject to reinsurers related legislation.

The Federal Financial Supervisory Authority ( BaFin ) monitors the sufficient coverage by own funds. Violations of the solvency solve sanctions by the BaFin, which in severity according to the above Levels are staggered ( § 81b VAG ).

Example calculation formula

Message index (18 % x gross ( for premium volume to € 57.5 million ) 16 % of gross premiums ( for premium volume of € 57.5 million ) ) x retention rate (min. 50% )

Damage Index ( 26 % x gross claims (for claims expenses to € 40.3 million ) 23% of gross claims (for claims volume over € 40.3 million ) ) x retention rate (min. 50% )

Review and outlook

The existing solvency rules are often criticized. Among other things, it is argued that the multipliers to calculate the Sovabilitätsspanne were fixed arbitrarily in a political process, and thus the risk theoretical knowledge of the entire post-war period were not considered. With the contribution index results in the paradox that an insurer calculates the cautious and demanded higher premiums, thus has a higher solvency needs.

It is also critically evaluate that future profits for life insurers enter into the actual Solva. If a company is already in difficulty, so you can hardly expect even against future profits. On the other hand, should an insurer that is doing well, do not require any future profits in order to pass the solvency test.

With the European Solvency II project, the European solvency system will be adapted to the modern regulatory requirements. The Solvency II Framework Directive was adopted on 10 November 2009. An implementation of the new, more risk-based rules into national law has been moved regularly.

In addition to the principles-based prescribed approaches for the solvency capital requirement in the European Directive also under the heading Own Risk and Solvency Assessment ( often abbreviated as ORSA ) is a company-specific risk and solvency before, in which the total capital requirement with a view of the risk profile, taking into account the company's guidelines regarding risk tolerance and possibly rating classifications, the medium-term compliance with the capital requirements and the recognition and measurement requirements for technical provisions and the adequacy of the methods used to account for the risk profile should be assessed in the solvency capital requirement. This instrument of governance and risk management systems of insurance companies must be fulfilled independent of the Nutzund the standard formula or an internal model. Equalization through the process of implementation of Solvency II in the spring of 2013 the so-called interim measures published in the Inspectorate EIOPA sees this before a transposition into national law in 2014.

Banking

Solvency ( Solvency Regulation, Entry into force: 1 January 2007; application of the principle I pursuant to § 339 para 9 of the Solvency Regulation at the latest until 31 December 2007)

Under § 10 of the German Banking Act (KWG) must Institutes ( § 1 para 1 of the Banking Act ), groups of institutions ( § 10a, Section 1 of the German Banking Act ) and financial holding groups ( § 10a para 3 of the Banking Act ) in the interest of fulfilling its obligations to its creditors, in particular in the interest of safety of the assets entrusted to them, have adequate capital. The Federal Ministry of Finance in consultation with the Deutsche Bundesbank, the Regulation on capital adequacy of institutions, groups of institutions and financial holding groups ( Solvency - Solvency Regulation ) was adopted, which contains detailed provisions on the capital adequacy (solvency). An institution shall have due to the scheme of § 10 of the German Banking Act and § 2 of the Solvency Regulation adequate own funds, if the overall ratio according to Article 2 § 6 of the Solvency Regulation 8% not less than each business day.

Under the rules of the Solvency institutions, groups of institutions and financial holding groups have their counterparty risk, operational risk and market price risk quantification and with own funds. The requirements of the Solvency must be observed each business day. Institutions have the Deutsche Bundesbank prior to the reporting date at the end of a calendar quarter to 15 messages each business day of the month following the reporting date submit.

The determination of the capital charge for counterparty default risk is based on the credit risk standardized approach ( CRSA ) or the internal ratings-based approach (IRBA ). To calculate the capital requirements for operational risk, institutions can use the Basic Indicator Approach (BIA ), the Standardised Approach (STA ) or Advanced Measurement Approaches (so-called Advanced Measurement Approaches AMA). The capital requirements for market risk can be determined using the standard method (SM) or with internal market risk models.

Based on the volume and nature of the expenditure incurred by the institutions these shops are divided into non-trading book or the trading book institutions. Institutions whose trading book has only minor importance, may waive as a relief to the calculation of trading book risks and these count as credit risk positions.